Leadership At Berkshire Hathaway And General Electric Commerce Essay Example

Report in 2008.

The council places importance on reducing product costs, overhead expenses, inflation rates, inventory growth, and increasing prices. It also serves as a platform for sharing best practices regarding productivity, simplification, sourcing restructuring quality management,and introducing new products - all crucial factors in today's competitive globalized environment.

To measure progress across the company, the council uses a standardized scorecard system that ensures all businesses benefit from its achievements. General Electric has been recognized as a leader in corporate strategic concepts and innovations for more than five decades. It consistently ranks among Fortune Magazine's top five "America's Most Admired Corporations" since this list began.

This project focuses on analyzing the success factors of two American conglomerates: Berkshire Hathaway and General Electric through their diversification strategies and accomplishments.According to the researcher, diversification is a growth strategy. Both Macron Associated and Berkshire Hathaway are well-known companies that have achieved growth through acquisitions. Macron Associated specifically mentioned Berkshire Hathaway and General Electric as firms with exceptional ten-year shareholder returns. These companies share common traits such as fiscal discipline, thorough analysis and evaluation, reluctance to overpay for acquisitions, and willingness to shut down or sell existing operations (Kaye and Yuwono, 2003). It is worth noting that arguments against conglomerates may be exaggerated as diversification can have potential benefits in certain circumstances. Warren Buffett, a highly skilled investor and one of the world's wealthiest individuals, demonstrates this through his dominant logic at Berkshire Hathaway (Prahalad and Betis, 1986, 1995). Berkshire Hathaway operates ventures in manufacturing, insurance distribution ,and retailing across various sectors. Buffett's investment strategy focuses on mature enterprises where he understands and trusts their management teams.During the late 1990s e-business boom,

Warren Buffett consciously avoided investing in high-tech companies as they did not align with his dominant logic. Developing markets offer favorable opportunities for conglomerates, providing an alternative means of allocating and cultivating capital or managerial talent within their organizational boundaries, particularly in countries where external capital and labor markets are inefficient.

Korean conglomerates known as chaebol experienced rapid growth in South Korea by mobilizing investment and developing managers, something that standalone companies traditionally struggled with. These chaebol also benefited from strong cultural coherence among their directors, reducing coordination and monitoring costs compared to Western conglomerates where directors have less trust. This dynamic may exist in other emerging economies with underdeveloped capital and labor markets.

General Electric (GE) serves as a successful example of operations in developing countries through the completion of the Hamma Seawater Desalination Plant in northern Africa in 2008. This plant is now the largest desalinization facility in the region, providing clean drinking water for 2 million Algerian residents daily. GE's Oil & Gas and Power & Water divisions employ innovative thinking and cutting-edge technologies to address challenges posed by Algeria's harsh climate.Not only does this benefit Algeria, but it also positions GE for a better future. In the United States, graduate students strive to secure entry-level positions with diverse corporations like General Electric and Berkshire Hathaway. These companies offer opportunities and access to high-quality employees that they tend to hire. The success of General Electric and other corporations is often attributed to their strong nucleus values, which are the guiding principles of their strategy. This culture of innovation has been developed by leaders over the decades and continues to unify GE units worldwide.

Effective communication

of the strategy is crucial, focusing on key components without unnecessary details or complex language. CEO Jack Welch famously stated that GE should aim to be a top player in every market.Diversified companies can create value by utilizing their general management capabilities, strategic management systems, and resource allocation processes across different businesses.Strategic commonalities among diversified corporation's businesses are essential for such economic systems (Robins and wiersema, 2002).

Berkshire Hathaway has chosen its various businesses based on their ability to benefit from the management style established by Warren Buffet and CEO Charles Munger.The company operates in various industries including insurance, confectionery, furniture, kitchen knives, jewelry, and footwear. This connection is established through similar strategies, resource allocation procedures, and control systems across the different businesses within the corporate portfolio.

In contrast, General Electric (GE) operates in a wide range of markets such as electricity generation (including atomic, gas, and solar), lighting, industrial automation, medical imaging equipment, motors,
railroad engines,and aircraft jet engines. GE also co-owns NBC Universal with Vivendi. Despite having numerous business divisions,G E continues to be successful.

Financial researchers have expressed concerns about the advantages and disadvantages of corporate diversification for stockholder value benefits. Corporate diversification offers several benefits primarily due to the advantages of internal capital markets compared to external funding. Diversified companies with a strong internal capital market can avoid transaction costs and additional expenses related to information asymmetry (Chandler 1977 Stein 1997), allowing for more efficient allocation of capital. Additionally,diversified companies enjoy reduced corporate-level risk as lower cash flow volatility increases their debt capacity without incurring excessive financial harm (Lewellen 1971).Lower volatility also helps mitigate underinvestment costs when external funding is unavailable or too costly (e.g.,

Stulz 1990). Businesses like Berkshire Hathaway and General Electric create value by acquiring companies at favorable prices and closely monitoring their financial performance through an effective internal capital market. It's worth noting that Jack Welch from General Electric drove organizational change through various initiatives, including the "General Electric growth engine," "boundarylessness," "six-sigma quality," and "destroy-your-business-dot-com."

Research suggests that diversification serves as a strategy for companies to expand into new product markets, showcasing corporate management focus and resulting in increased diversified firms. Companies pursue diversification primarily for three reasons: growth, risk reduction, and profitability. Generally, diversification is driven by the desire for growth and risk reduction, even if it does not align with creating shareholder value.

Both General Electric and Berkshire Hathaway have pursued growth strategies through acquisitions. Since the 1970s, Berkshire Hathaway has been acquiring stakes in companies consistently growing through these acquisitions. In February 2010, they made their largest purchase ever by buying the remaining portions of Burlington Northern Santa Fe Corporation for $26 billion. In 2008, General Electric purchased Vital Marks Inc for $860 million.In 2009, it was announced that plans were in place for the acquisition of Vivendi's interest in NBC Universal and the sale of a majority stake to Comcast, while still retaining a 49% stake (Goldman and Pepitone, 2009). Both companies have the goal of increasing shareholder wealth through acquisitions and expansions, aiming to distribute risks and minimize the impact of diversification on risk. Diversification can decrease risk by bringing separate businesses under common ownership without affecting their individual cash flows, as long as these cash flows are not strongly correlated. As a result, combined businesses experience lower volatility in cash flow

compared to each individual business on average. Throughout the years, both companies have engaged in various activities to expand their businesses. Research has shown that companies that diversify into closely related industries tend to be more profitable than those pursuing unrelated diversification. Peters and Waterman (1982) suggest that unfocused diversification is not beneficial and organizations that remain focused on their core competencies perform better. Our main principle is clear: organizations that branch out but remain focused on their core competencies achieve greater success. The most successful companies, such as 3M with its expertise in coating and bonding engineering, diversify based on an individual accomplishment. On the other hand, companies that venture into related fields like General Electric transitioning from electric power generation turbines to gas engines make up the second group in terms of success.The text states that companies that diversify into various fields are typically the least successful. Acquisitions within this group are generally not successful either. Peters and Boatman (1982) suggest that diversifying in related concerns can actually increase stockholder value for companies by allowing them to share capabilities and resources across their businesses. Conglomerates like GE and Berkshire Hathaway may improve profitability by growing related concerns because it spreads risks and increases profitability across different sectors.

This research paper aims to examine the costs and benefits of product diversification, specifically focusing on the relationship between various business activities within a company. If these activities have a common input that cannot be divided, a diversified company can benefit from economies of scale. This means that utilizing shared resources for multiple activities can result in cost savings compared to carrying out those activities separately (Baumol,

Panzer, Willig 1982).

Furthermore, another advantage of diversification is the potential for economies of scope in finance when combining an industrial company with a financial services company. General Electric has successfully reduced its cost of capital by integrating both sides of the company. Moreover, economies of scope can also arise from tangible inputs such as shared R&D departments or distribution systems, as well as intangible assets like brand names and production expertise.General Electric's brand is recognized as the fourth most valuable in the world, with an estimated value of approximately $48 billion (Business week, 2009). Within diversified companies like General Electric, businesses can be related in two ways. First, they may share markets, distribution systems, product and process technologies, or manufacturing facilities (Ansoff 1965, Rumelt 1974, Teece 1980). Alternatively, they may rely on common technologies, managerial capabilities and routines (Prahalad/Bettis 1986,Kazanjian/Drazin 1987,Winter 1987 ,Grant 1988). These shared assets can be utilized with minimal marginal costs.

General Electric engages in various activities such as R&D and distribution channels across its wide range of concerns. Despite the complex nature of managing such businesses and the associated transaction costs they ultimately benefit from high returns.

In Berkshire Hathaway's compensation program for directors, modest wages are given along with significant cash bonuses if performance targets are met. The compensation program is tailored to each business based on its economics and competitive position. Directors receive rewards for their control over specific areas of the business like insurance contract growth and profitability. The main focus is on generating free cash flow for the company.

While equity-based awards are not given due to their inability to closely align with performance, cash bonuses can reach exceptionally

high amounts for outstanding achievements sometimes reaching into tens of millions.Berkshire Hathaway's compensation structure differs from other companies, as it focuses on goal achievement and high performance rather than size or diversification. Warren Buffett and Charlie Munger, however, receive relatively low compensation in comparison to others in similar positions. They are paid a fixed salary of $100,000 and do not receive bonuses, options, or restricted grants. Instead, their incentive comes from the company stock they personally purchased back in the 1960s. As of 2009 year-end figures, Buffett's stock holdings were valued at $40 billion while Munger's were valued at $1.3 billion.

Similarly, board members at Berkshire Hathaway also receive modest fees for their services but are encouraged to invest significant amounts of money into company stock. This demonstrates that top management's performance is not affected by diversification across various business areas; each director is rewarded based on exceptional performance within their specific area of responsibility.

In contrast to Berkshire Hathaway, General Electric CEO Mr. Immelt earns a higher salary than Warren Buffett with a base salary of $3,300,000 and additional bonuses. The directors at General Electric follow a compensation plan that includes appropriate metrics and incentives over relevant performance periods.The company prioritizes consistent public presentation and discourages short-term behaviors that prioritize immediate positive outcomes without considering risk management or long-term business health. General Electric's compensation strategy combines rewards for current and long-term performance, including metrics like earnings per share, revenue, and cash flow growth. The approach aims to foster innovation, ensure effective execution, and manage risks over the long term. While adjustments may be made in response to changing conditions, maintaining consistency in compensation philosophy is important.

Despite the possibility of executive performance not immediately impacting stock price during economic stress, General Electric still recognizes value-creating performance as it believes it leads to eventual stock price appreciation. Unlike relying on a committee or risk management function, Warren Buffet personally oversees enterprise risk management at Berkshire Hathaway as he considers himself the chief risk officer. He delegates responsibility based on directors' demonstrated skill and integrity to mitigate business risks effectively.Charlie Munger, in explaining Berkshire Hathaway's approach to trust and decision-making, contrasts it with the belief held by some that more processes and conformity would yield better results. He emphasizes the importance of a seamless web of trust at Berkshire Hathaway.

The global economic crisis highlighted the failure of many executives and businesses to understand, effectively manage, and value risk. At GE, however, they have established effective strategies and management processes for handling risk and maximizing opportunities across their various businesses.

These strategies include long-term strategic planning, executive development and evaluation, regulatory and litigation compliance reviews, environmental compliance assessments, GE Capital's corporate risk map, and oversight from the senior level Corporate Risk Committee.

Given the ongoing financial crisis, successful risk management is increasingly important for gaining a competitive advantage and achieving long-term success at GE. They have designed an executive compensation plan that rewards those who excel in managing risks.

Both General Electric and Berkshire Hathaway have demonstrated their ability to identify and adapt strategies to safeguard their companies. They have taken swift actions such as improving liquidity, raising capital, addressing financial concerns, as well as divesting from businesses with unfavorable risk-adjusted returns.Both General Electric and Berkshire Hathaway prioritize rewarding individuals who safeguard the company's interests, while acknowledging

that compensation may decrease during economic stress and reduced profits. Additionally, both companies effectively manage risks across their diversified business portfolios. The responsibility for reducing risk is shared by the CEOs of both companies, with Berkshire Hathaway's CEO considering himself as the chief risk officer.

Furthermore, both corporations align with Miles and Snow's Prospector strategy by actively expanding into new markets and opportunities through their diversified businesses. This aggressive strategy involves proactive growth plans focused on advanced merchandise development. Both companies employ aggressive tactics to gain a larger market share without extensive research.

Significant portions of revenue for both General Electric and Berkshire Hathaway come from new products or markets, often supported by venture capitalists who provide substantial leverage and equity funding. Despite the associated risks such as product failure and market rejection due to the constantly evolving market sphere, being industry pioneers is highly valuable for both General Electric and Berkshire Hathaway. This advantage allows them to price premium products for higher profit margins.

Both companies also have a reputation for their opportunistic approach to recruiting key employees through headhunting methods.Companies that adopt the prospector strategy allocate a significant portion of their budget to advertising, sales promotion, and personal selling. This allocation greatly contributes to their overall sales. These companies have strategic business units that operate autonomously. Berkshire Hathaway delegates responsibility for public performance to local directors in order to mitigate risks and capitalize on opportunities in their industries. On the other hand, General Electric has decentralized decision-making within its business units.

These actions are particularly advantageous for companies in their early stages of the life cycle as they face minimal competition and have access to emerging technologies.

In 2009, General Electric acquired Vivendi, which specializes in various media activities such as cinematography, publishing, telecommunications, music, television, the internet, and video games. This acquisition was made due to Vivendi's financial difficulties resulting from excessive expansion during the late 1990s and early 2000s.

Furthermore, General Electric also purchased Vital Signs Inc., a manufacturer of disposable medical products used in surgical procedures for patient respiratory assistance. The acquisition took place in 2008 for $860 million. Similarly, Berkshire Hathaway has been actively making acquisitions in recent years. In 2006, they made their first purchase of a foreign subsidiary by acquiring an 80% stake in Iscar Metalworking for $4 billion.In August 2009, another branch of Berkshire Hathaway Inc., Johns Manville Corp., purchased Corbond Corp. This company specializes in producing polyurethane spray foam insulation products.